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X3D Fritz Main Liberalism August 25, 2003 The American Prosperity Myth The following article appeared in the September 1 edition of The Nation . The American Prosperity Myth by Will Hutton Everyone knows the story by now. America may have its social problems, but its highly productive, job-generating, innovative economy is the envy of the world. Europeans, on the other hand, are in a despond of high unemployment and economic sclerosis. Europes addiction to welfarism-its overcooked social contract-is killing the economic goose that lays the social egg. Americans may pay a price in inequality for their economic vitality, but when you take the countrys extraordinary social mobility and opportunity into account the price is worth paying. You might want to reverse Bushs tax cuts for the very rich, but nobody sane is going to tinker with the essence of the great American Business Model that delivers so much wealth. I contend-unfashionably and, I know, incredibly, given the consensus-almost the opposite. The American economy has great strengths, but it is not so all-conquering. And the American Business Model, with its ruthless focus on shareholder profits, has profound weaknesses. Indeed, American industry is at its strongest where it has not observed antistate, progreed precepts and operated in more European ways. Smart action by the state, a viable social contract and efforts by companies to harness human capital and serve a purpose larger than short-term profit maximization turn out to be indispensable components of successful American capitalism as well-though Americas public conversation hardly concedes these points. For a start, the United States is experiencing an alarming and unsustainable growth of international indebtedness. By the end of this year the countrys net liability to the rest of the world will approach $3 trillion, and it is growing exponentially. At the current rate, liabilities will double again over the next five to seven years, taking the United States into banana republic territory. At some point foreigners will cease holding dollars and instead buy the alternative world currency-the euro. The dollar will crash and interest rates will jerk upward in response. America has been running a trade deficit for so long that it has ceased to be worthy of note. Yet the consistent inability of so many American companies in so many sectors to compete against their foreign rivals surely exposes faults in our approach to investment and productivity. From cars to aerospace, industrial gases to cell phones, American companies lag behind their European competitors in technology, production savvy and rate of innovation. Ford and GM are a decade behind Volkswagen in the sophistication of their production techniques. Nokia has 39 percent of the world mobile phone market, more than twice that of Motorola, its nearest rival-despite Nokias being based in the highly taxed, highly unionized, generous welfare state of Finland. Boeings government subsidies through its military contracts, grants and tax breaks comfortably match the diminishing support proffered Europes Airbus, but it is Airbus that is pioneering the next generation of civilian aircraft and whose market share is larger. Americas once proud culture of business building has given way to a culture of financial engineering, a doctrine of shareholder value maximization and a cult of the takeover. The game is to keep the share price up, and every sinew of the organization is bent to that end;
Still, investment banks continue to seduce overpaid CEO after CEO into believing that his deal will be the exception. And with share options that will provide fortunes if the deal comes off and golden parachute clauses that will secure an equally good pay-off if it bombs, most CEOs fall prey to the seduction. Despite a welcome wave of criticism of this febrile, amoral atmosphere, few took note in the heady days of the dot-com and telecom bubbles that this system was hollowing out the US economy. American productivity measured as output for every person-hour worked is now lower than in France, the old West Germany, Belgium and Holland. Most other parts of Europe are catching up with the United States fast, a trend that began in the late 1960s and has been continuing ever since. Economist Julian Callow of Credit Suisse First Boston calculates that after adjusting for the very kind way American statisticians compute productivity compared with those in Europe, Europes growth in productivity outstripped the United States during the 1990s. This is the reality behind the ballooning current account deficit numbers. The US economy may boast an innovative IT sector and technological leadership in the military industry;
This economic strength pays for a social contract that offers most individual Europeans opportunity, mobility and security that is beyond the compass of most ordinary Americans. American social mobility, traditionally comparable to Europes, is falling as decades of tax cuts and spending cuts undermine the opportunities for advancement. The chief culprit is the emergence of a highly stratified, increasingly class-based university system, whose very accessibility was once one of Americas glories. The academic excellence of top US universities is not in question, but it is unclearwhether they still contribute as they once did to equal opportunity and social mobility. The competition to attract the worlds best academic talent and fund cutting-edge research has meant an explosion of costs and a parallel explosion in tuition fees. For the private universities-and all but one of the top twenty are private-annual tuition, even before living expenses, tops $17,600. Even public university tuition now averages more than $7,000 per year. The conservative defense is that rich endowments allow private universities to practice need blind admission and offer students whose families cannot afford the cost a mix of grants, loans and work-study that together will see them through college. Universities may be getting more expensive, so the mantra goes, but there is sufficient support to help the poorest. Endowment income is not matching the rise in tuition-now set to go substantially higher in public universities as states struggle to balance their budgets. At the same time, the Federal Pell Grant has been pared back by successive administrations in a conservative climate hostile to sustaining such social expenditures. With fewer grants, students have to incur huge loans to complete college, which unsurprisingly deters those from poorer homes. In 1979 children from the richest 25 percent of American homes were only four times more likely to go to college than those from the poorest 25 percent of homes;
With the recent rise in tuition fees-up by a cool 20 percent on average since 2000-and further erosion of private and public grants, the divide can only have deepened. A new aristocracy is emerging in a country whose original ambition was to prevent such a phenomenon from ever taking place. It was only in Old Europe that status, opportunity and life chances were determined by accident of birth. Twenty-five years of conservative economic and social policies are burying that American dream. The constricting access to university for students of middle- and low-income homes is remarkably underreported in the American media, as is the consequent impact on social mobility. The blithe assumption remains that opportunity in the United States is unparalleled. At the primary and secondary levels, public schools, profoundly underfunded, are a second-class system compared with private schools. Students in public schools are less likely to complete their courses, and achieve poorer grades when they do. But for the beleaguered community-college system, the United States has no formal means of giving extensive vocational and apprentice training. The combination of high dropout rates, gaps in the system, sheer lack of capacity and indifferent standards means that an astonishing 31 percent of American 18-year-old dropouts receive no vocational or other formal training after leaving school. Thus the children of poor and middle-...
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